Monday, December 17, 2007

Talking to Neighbors (Syrian Version)

Last Updated: December 30, 2007

December 17, 2007

Syria's economic reform will have its moment of truth next year when the government starts phasing out subsidies on oil products and other commodities. The government has made public a plan to increase diesel prices by 70% in 2008. The plan envisions subsidies to be completely eliminated by 2012 when prices should reach international levels.

In its latest reports from Syria IRIN (Integrated Regional Information Networks) has repeatedly referred to the possibility of social unrest in case the government proceeds with its plans to remove price controls. Over the last years problems have kept mounting for the regime in Damascus in the form of ballooning budget deficits, high unemployment and rising inflation. At the root of Syria's problems lays a combination of a failing socialist economy no longer capable of coping with the country's runaway demographics, declining oil production that used to provide a lion's share of state revenues and a massive influx of Iraqi refugees.

While public services are crumbling under stress generated by the rapid population growth, the government has largely failed to create alternative sources of revenues to compensate for the plummeting output of the country's oil fields. Being part of the UN Office for the Coordination of Humanitarian Affairs, IRIN should know well what it's talking about when reporting on the situation of Syria's health system.

Syria’s public health system is under severe strain. Although the quality of its health care remains regionally strong, growing budget deficits, ballooning demographics and the influx of an estimated 1.5 million Iraqis, all of whom qualify for free healthcare, means the need for state hospitals and clinics is soaring, even as the money to pay for them grows less each year.

Syria’s budget deficit has gone from bad to worse in recent years. Annual deficits have increased from 1.7 percent of gross domestic product (GDP) in 2001 to 5 percent in 2005 and with spending increases in 2006 Damascus-based economists estimate the deficit will reach 7.6 percent.

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The deficits are growing as Syria’s demographics experience massive change. Syria’s population of 19 million is growing at 2.5 percent a year, around 475,000 people, while the influx of up to 1.5 million Iraqi refugees has further swelled the population by around 8 percent since 2003 and put an unsustainable strain on public services.

“Though there are a lot of public hospitals, which are free of charge, the quality is not so good and is decreasing,” said Syrian economist, Samir Seifan. “When you have 2.5 percent population growth each year you need to improve the budget by more than 2.5 percent at minimum. But the state budget doesn’t have enough resources; we’ve had a deficit for the last few years.”

The unemployment situation is even more extreme as Syrian workforce is expanding at an even higher rate of 4% annually (that was the population growth 20 years ago).

Syrian socialism has a long tradition of subsidizing the price of basic commodities but recently the system has been displaying increasing signs of stress. In particular domestic oil consumption has overshoot earlier projections thanks to illegal smuggling to neighboring countries and growing demand from the rapidly expanding population. There is a real possibility that the budget may eventually collapse.

Syria’s socialist Baath Party government, with its centrally planned economy, has subsidised commodities such as bread, rice and sugar, as well as electricity and fuel by up to 40 percent since it came to power in 1963.

However, increasing domestic consumption by a rapidly growing population, further swelled by the influx of around 1.5 million refugees from Iraq, is now putting unbearable pressure on state coffers.

Syria’s 40-year-old policy of subsidising everything from electricity to fuel and food is reaching breaking point. The rising costs of oil, increased fuel smuggling to neighbouring countries and declining state revenues have left the government struggling to pay its bills.

Next year’s subsidies will cost the government about US$7 billion, according to Deputy Prime Minister Economic Affairs, Abdullah Dardari, a situation he described as “no longer bearable”.

The removal of oil subsidy is bound to produce a chain reaction affecting a wide range of products and services. The experience of other Arab regimes with price liberalization suggests a widespread social unrest in Syria next year.

Subsidy reform has led to unrest in countries across the region such as Yemen, Egypt, Jordan and Iran, and the government is acutely aware of the inflammatory potential of oil price hikes.

In the words of a minibus driver in Damascus on hearing of Dardari’s 70 percent increase in diesel prices by next year: “There is a lot of anger on the street about this new law. The situation might explode.”

“The government has already stopped subsidising olive oil and tea; we rarely cook meat now, only when we have guests and then we only cook chicken, never red meat,” said Muhammad Salem, a taxi driver in Damascus.

“If the government removes subsides on petrol and diesel the cost of everything will go up. Providing for my family is going to be very difficult if the cost of bread gets any higher,” Salem said.

Inflation, currently running at about 14 percent, according to the International Monetary Fund, would rise: “The government says they expect inflation to increase 5 percent next year but I think the figure is very much below what we can expect,” said Jihad Yazigi a Syrian economist and chief editor of The Syria Report.

Independent economists estimate unemployment levels to be over 20 percent and the UN Development Programme reported in 2005 that 30 percent of the population lived in poverty and 11.4 percent lived below subsistence level.

While Israeli politicians and analysts are debating pros and contras of negotiating with the regime in Damascus, the regime itself may be living through its last decade. And the end of the regime may well spell the end for the country it used to rule. Nobody can know for sure what sort of Syria is there after so many years spent under this totalitarian regime, but it can easily happen to be worse than Iraq.

A recent study, presented at a national conference on population policy on 10 December in Sanaa, said their was a widening gap between population growth and economic growth: Yemen has one of the highest population growth rates in the world - 3.2 percent per annum - but its economy is shrinking.

The study, entitled Balance Between Population Growth and Development Rates in Yemen, was written by experts at the National Population Council (NPC), a government body.

It said the gross domestic product (GDP) growth rate between 2001 and 2007 was well below what was planned: In 2001-2005 it was 4.5 percent instead of the planned 5.6 percent. In 2006 and 2007 it was 3.8 percent and 2.6 respectively, although the five-year plan envisaged growth of 4.9 percent and 5.5 percent in these years.

According to the Yemen Poverty Assessment report, prepared by Yemen’s government, the World Bank, and the UN Development Programme (UNDP) and which was released in December 2007, unemployment increased from 13.7 percent in 1999 to 16.3 percent in 2004: the labour force increased at a rate of 4.3 percent per year but the number of jobs increased by only 3.7 percent per year.

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According to Mojahed al-Shaab, an NPC spokesperson, there is a natural increment of around 700,000 people a year. “They need health care and education. Population growth is putting pressure on the country’s resources. If the situation remains as it is, the state would not be able to meet the demands of its people,” he warned.

“The number of students increases each year. The state cannot cover the demand for new schools. The number of students increased from two million in 1990 to 4.7 million in 2004, while 40 percent of children do not attend primary school,” he said.

According to the NPC, 45.3 percent of the population is illiterate, and primary education enrolment is only 62.5 percent. However, 45 percent of the population is under 15.